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Brief Answer Question
Attempt All question
What do you mean by wealth maximization goal of the firm?
How does perpetuity differ from annuity?
What is beta coefficient and what objective does it serve?
What do you mean by financial risk?
Write the meaning and reasons of stock repurchase.
How does the operating BEP differ from cash BEP?
Mega Company expects next year's net income to be Rs 8 million. The firm's current debt ratio is 60 percent. The company has Rs 10 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual dividend model, how large should company's dividend payout ratio be next year?
A firm has DOL of 2 times and DFL of 3 times. Its net income is Rs 200,000. What is its degree of total leverage? If sales increases by 10 percent, what will be its new net income?
Sagarmatha Company uses 500,000 units of a product per year on a continuous basis. The product has carrying costs of Rs 10 per unit per year and fixed costs of Rs 1000 per order. What is its EOQ?
Delta Company's inventory conversion period is 40 days, and an average collection period is 50 days. Account payable is paid approximately 30 days after they arise. Calculate the firm's cash conversion cycle.
Descriptive Answer Question
Attempt any Five questions
Explain the concept and importance of working capital management in Nepalese manufacturing and trading company.
Assume that it is now January 1, 2024. On January 1, 2025, you will deposit Rs. 400,000 into a savings account that pays 10 percent.
a. If the bank compounded interest annually, how much will you have in your account on January 1, 2028
b. What would your January 1, 2028, balance be if the bank used quarterly compounding rather than annual compounding.
c. Suppose you deposit the Rs. 400,000 in 4 payments of Rs. 100,000 each on January 1 of 2025, 2026, 2027, and in 2028. How much would you have in your account on January 1, 2028, based on 10 percent annual compounding?
(a) What do you mean by financial statements? Describe the major types of financial statements.
(b) Primal Transport Company has current assets of Rs. 2,000,000 and current liabilities of Rs. 1,000,000. What effect would the following transactions have on the firm's current ratio?
a. Two new trucks are purchased for a total of Rs 800,000 in cash.
b. The company borrows Rs 500,000 on short-term basis to carry an increase in receivables of the same amount.
c. Additional common stock of Rs 1,000,000 is sold and the proceeds invested in the expansion of several terminals.
Janakpur Sweets Company is experiencing a period of rapid growth. Earnings and dividends are expected to grow at a rate of 10 percent during the next 2 years, at 8 percent in the third year, and at 5 percent constant rate thereafter. Company's last dividend was Rs 20, and the required rate of return on the stock is 15 percent.
a. Calculate the value of the stock today.
b. Calculate value of stock at the end of year 1, (P₁).
c. Calculate the dividend yield and capital gain yield for the first year.
Suppose Bagmati Textile Company sold an issue of bonds with a 10-year maturity, a Rs 1,000 par value, a 10 percent coupon rate, and annual interest payments.
i. If the investors' required rate of return on such bonds is 12 percent. At what price would the bonds sell?
ii. If actual price is Rs 900, calculate yield to maturity.
Sahara Company has the following capital structure, which it considers to be optimal:
| Debt | 40% |
| Preferred stock | 10 |
| Common equity | 50 |
| 100% |
Sahara's current dividend per share is Rs 30. Investors expect future earnings and dividends to grow at a constant rate of 5 percent per year forever. The company's stock currently sells for Rs 280 per share. New common stock can be sold for Rs 250 per share. Preferred stock can be sold with a dividend of Rs 14 to yield at a price of Rs 95 per share. Debt can be sold at an interest rate of 10 percent. Assume the applicable tax rate is 30 percent.
a. Calculate the cost of each capital component.
b. Calculate the weighted average cost of capital (WACC) assuming equity requirement is fulfilled from external equity only.
c. What are the uses of cost of capital?
Analytical Answer Question
Attempt any Two questions
What is financial management? Explain the functions of financial management.
Consider the probability distribution of alternative rates of return associated with Stock A and Stock B given in the following table.
| State of economy | Probability | Stock A | Stock B |
|---|---|---|---|
| 1 | 0.3 | 0% | 25% |
| 2 | 0.4 | 20 | 15 |
| 3 | 0.3 | 30 | 5 |
a. Calculate the expected return and standard deviation of Stock A and Stock B.
b. What are the covariance and correlation coefficient between Stock A and Stock B.
c. If you form a portfolio of Stock A and Stock B comprising 40 percent wealth in Stock A and the rest in Stock B, calculate the portfolio return and standard deviation. Also interpret the results.
d. What advantage an investor can achieve by investing his/her fund in the combination of stock A and Stock B instead of investing total fund either in stock A or Stock B? Explain.
Lumbini Furniture (Pvt) Ltd. is considering these two projects: Project X and Project Y. Each project has a cost of Rs 20,000,000, and the cost of capital for each project is 15 percent. The expected net cash flows are as follows:
| Year | Expected Net Cash Flows (in thousand) | |
|---|---|---|
| Project X | Project Y | |
| 0 | (Rs 20,000) | (Rs 20,000) |
| 1 | 8,000 | 12,000 |
| 2 | 8,000 | 7,000 |
| 3 | 8,000 | 5,000 |
| 4 | 8,000 | 4,000 |
a. Calculate each project's payback period, net present value, and internal rate of return.
b. Which project or projects should be accepted if they are independent?
c. Which project should be accepted if they are mutually exclusive?
d. How might a change in the cost of capital produce a conflict between the NPV and IRR ranking of these two projects? Would this conflict exist if cost of capital were 5 percent?